<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
Commission file number 0-21003
TWINLAB CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 11-3317986
(STATE OF INCORPORATION) (IRS EMPLOYER IDENTIFICATION NO.)
150 Motor Parkway, Suite 210, Hauppauge, New York 11788
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
(631) 467-3140
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
At October 31, 2000, the registrant had 28,647,967 shares of common stock
outstanding.
<PAGE> 2
PART I
FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
TWINLAB CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS)
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 DECEMBER 31, 1999
------------------ -----------------
(unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 3,617 $ 3,994
Accounts receivable, net of allowance for bad debts of $2,260 at
September 30, 2000 and $918 at December 31, 1999 53,480 52,454
Inventories 62,401 71,826
Deferred tax assets 7,682 4,497
Prepaid taxes 11,574 8,183
Prepaid expenses and other current assets 4,103 2,941
--------- ---------
Total current assets 142,857 143,895
Property, plant and equipment, net 49,559 46,168
Deferred tax assets 36,945 40,269
Other assets 53,486 55,925
--------- ---------
TOTAL $ 282,847 $ 286,257
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 38,689 $ 597
Accounts payable 28,761 33,152
Accrued expenses and other current liabilities 11,049 25,780
--------- ---------
Total current liabilities 78,499 59,529
Long-term debt, less current portion 48,732 63,203
--------- ---------
Total liabilities 127,231 122,732
--------- ---------
Commitments and contingencies
Shareholders' Equity:
Preferred stock, $.01 par value; 2,000,000 shares
authorized; none issued -- --
Common stock, $1.00 par value; 75,000,000 shares authorized;
32,748,867 issued and 28,647,967 outstanding as of September 30,
2000 and 32,706,233 issued and 28,605,333 outstanding as of
December 31, 1999 32,749 32,706
Additional paid-in capital 289,679 289,336
Accumulated deficit (130,018) (121,723)
--------- ---------
192,410 200,319
Treasury stock at cost; 4,100,900 shares (36,794) (36,794)
--------- ---------
Total shareholders' equity 155,616 163,525
--------- ---------
TOTAL $ 282,847 $ 286,257
========= =========
</TABLE>
2
<PAGE> 3
TWINLAB CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- -----------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
NET SALES $ 76,416 $ 81,921 $ 214,980 $ 227,613
COST OF SALES 59,656 44,336 128,810 117,940
--------- --------- --------- ---------
GROSS PROFIT 16,760 37,585 86,170 109,673
OPERATING EXPENSES 32,665 32,140 95,923 95,785
--------- --------- --------- ---------
INCOME (LOSS) FROM OPERATIONS (15,905) 5,445 (9,753) 13,888
--------- --------- --------- ---------
OTHER (EXPENSE) INCOME:
Interest income 133 121 305 338
Interest expense (2,055) (867) (5,972) (3,843)
Other (272) 8 1,901 20
--------- --------- --------- ---------
(2,194) (738) (3,766) (3,485)
--------- --------- --------- ---------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES
AND EXTRAORDINARY ITEM (18,099) 4,707 (13,519) 10,403
PROVISION FOR (BENEFIT FROM) INCOME TAXES (7,001) 1,826 (5,224) 4,036
--------- --------- --------- ---------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM (11,098) 2,881 (8,295) 6,367
EXTRAORDINARY ITEM, NET OF TAX -- (81) -- (81)
--------- --------- --------- ---------
NET INCOME (LOSS) $ (11,098) $ 2,800 $ (8,295) $ 6,286
========= ========= ========= =========
BASIC AND DILUTED INCOME PER SHARE
Income (Loss) Before Extraordinary Item $ (0.39) $ 0.09 $ (0.29) $ 0.20
Extraordinary Item -- -- -- --
--------- --------- --------- ---------
Net Income (loss) $ (0.39) $ 0.09 $ (0.29) $ 0.20
========= ========= ========= =========
Weighted Average Common Shares Used In
Computing Basic Income Per Share 28,645 31,802 28,636 32,121
========= ========= ========= =========
Weighted Average Common Shares Used
In Computing Diluted Income Per Share 28,645 31,834 28,636 32,142
========= ========= ========= =========
</TABLE>
3
<PAGE> 4
TWINLAB CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
2000 1999
-------- --------
(unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (8,295) $ 6,286
Adjustment to reconcile net income (loss) to net
cash (used in) provided by operating activities:
Extraordinary item -- 81
Depreciation and amortization 6,515 5,208
Bad debt expense 1,769 165
Deferred income taxes 139 2,499
Other 682 --
Changes in operating assets and liabilities:
Accounts receivable (2,795) 4,369
Inventories 9,425 6,115
Prepaid taxes (3,391) --
Prepaid expenses and other current assets (1,124) 544
Accounts payable (3,301) (12,049)
Accrued expenses and other current liabilities (14,731) 4,496
-------- --------
Net cash (used in) provided by operating activities (15,107) 17,714
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property, plant and equipment (5,130) (11,581)
Increase in other assets (302) (2,113)
-------- --------
Net cash used in investing activities (5,432) (13,694)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under revolving credit facility 21,000 5,000
Proceeds from issuance of debt -- 8,000
Payments of debt (838) (294)
Purchase of treasury stock -- (12,144)
Redemption of senior subordinated notes and related premium -- (3,333)
-------- --------
Net cash provided by (used in) financing activities 20,162 (2,771)
-------- --------
Net (decrease) increase in cash and cash equivalents (377) 1,249
Cash and cash equivalents at beginning of period 3,994 12,489
-------- --------
Cash and cash equivalents at end of period $ 3,617 $ 13,738
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the periods for:
Interest, net of amounts capitalized $ 4,547 $ 2,746
======== ========
Income taxes, net of refunds $ (1,902) $ 2,716
======== ========
Conversion of accounts payable to capital lease obligation $ 1,090 $ --
======== ========
Acquisition of equipment under capital lease obligation $ 2,369 $ --
======== ========
</TABLE>
4
<PAGE> 5
TWINLAB CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. BASIS OF PRESENTATION
In the opinion of management, the accompanying consolidated unaudited
financial statements include all necessary adjustments (consisting of
normal recurring adjustments and accruals and the third quarter inventory
adjustments described in note 2) and present fairly the financial
position of Twinlab Corporation ("Twinlab") and subsidiaries
(the "Company") as of September 30, 2000, and the results of its
operations and its cash flows for the three months and nine months ended
September 30, 2000 and 1999 in conformity with generally accepted
accounting principles for the interim financial information applied on a
consistent basis. The results of operations for the three months and nine
months ended September 30, 2000 are not necessarily indicative of the
results to be expected for the full year.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been omitted. These financial statements should
be read in conjunction with the audited consolidated financial statements
and notes thereto included in Twinlab's Annual Report to Stockholders on
Form 10-K for the fiscal year ended December 31, 1999, as filed with the
Securities and Exchange Commission ("SEC").
2. THIRD QUARTER HERBAL INVENTORY ADJUSTMENTS
For the quarter ended September 30, 2000, the Company recorded
adjustments aggregating $15,995 to reduce its herbal inventory balances at
its Utah location because of both book-to-physical inventory variances and
excess and slow moving products.
Book-to-Physical Variances
During the preparation of the financial statements for the quarter ended
September 30, 2000, the Company became aware of certain inventory
variances which prompted it to conduct a physical count of its herbal
inventories at its Utah location. The resulting physical inventory
compilation indicated inventory shortages totaling $8,023. Upon further
investigation, the Company determined that approximately $3,085 and $965
of these shortages were attributable to fiscal 1998 and 1999,
respectively. The Company also learned that the shortages relating to
fiscal 1998 and 1999 were primarily due to the recording of certain
entries without appropriate supporting documentation. Because the
adjustment relating to fiscal 1998 would have resulted in a $665 reduction
in fiscal 1998 executive bonuses paid, the executive officers will refund
these amounts, and the Company has recorded a receivable for such refunds.
Therefore, the net impact on income (loss) before provision for income
taxes and extraordinary item of the inventory shortages and bonus
adjustments relating to fiscal 1998 is approximately $2,420. The impact on
net income (loss) of these adjustments relating to fiscal 1998 and 1999 is
approximately $1,481 and $591, respectively. Accordingly, the Company
believes that these adjustments are not material for the purpose of
recording prior period adjustments.
Reserves for Excess and Slow Moving Products
The Company anticipated significant increases in sales for herbal products
during fiscal 2000. However, consistent with industry trends, sales of the
Company's herbal products were disappointing during the first two quarters
of fiscal 2000 and, in the third quarter, were significantly below
anticipated levels. As a result, the Company has significantly reduced its
projection of herbal sales for the year ending December 31, 2000, and has
also decided to discontinue the production and/or active marketing of
certain herbal products.
As a result, the Company analyzed potential excess and slow moving
inventory and increased its inventory reserves by approximately $7,972.
These increased reserves included approximately $5,409 relating to
products that will no longer be produced and/or actively marketed. Such
products include $3,852 of micro-encapsulated, herbal products, that were
introduced during the fourth quarter of fiscal 1998 but have experienced
disappointing sales.
5
<PAGE> 6
3. CONDENSED AND SUMMARIZED FINANCIAL INFORMATION
The Company's amended revolving credit facility and restrictive covenants
contained in the indenture governing the 10-1/4% senior subordinated notes
(the "Notes") restrict the payment of dividends and the making of loans,
advances or other distributions to Twinlab by any of its subsidiaries,
except in certain limited circumstances. The condensed financial
information of Twinlab, on a stand-alone basis, is as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 DECEMBER 31, 1999
------------------ -----------------
<S> <C> <C>
CONDENSED BALANCE SHEETS
ASSETS
Cash $ -- $ 338
Prepaid expenses and other current assets -- 2
Investment in subsidiaries 155,616 163,185
--------- ---------
Total $ 155,616 $ 163,525
========= =========
SHAREHOLDERS' EQUITY
Preferred stock, $.01 par value; 2,000,000 shares authorized; $ -- $ --
none issued
Common stock, $1.00 par value; 75,000,000 shares authorized; 32,748,867
issued and 28,647,967 outstanding as of September 30, 2000 and
32,706,233 issued and 28,605,333
outstanding as of December 31, 1999 32,749 32,706
Additional paid-in capital 289,679 289,336
Accumulated deficit (130,018) (121,723)
--------- ---------
192,410 200,319
Treasury stock at cost; 4,100,900 shares (36,794) (36,794)
--------- ---------
Total $ 155,616 $ 163,525
========= =========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
-------- ------- ------- -------
<S> <C> <C> <C> <C>
CONDENSED STATEMENTS OF OPERATIONS
Equity interest in net income (loss) of subsidiaries $(11,067) $ 2,828 $(8,201) $ 6,368
Operating expenses (51) (48) (155) (144)
Interest income -- 4 1 12
-------- ------- ------- -------
Income (loss) before provision for income taxes (11,118) 2,784 (8,355) 6,236
Provision for (benefit from) income taxes (20) (16) (60) (50)
-------- ------- ------- -------
Net income (loss) $(11,098) $ 2,800 $(8,295) $ 6,286
======== ======= ======= =======
</TABLE>
6
<PAGE> 7
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2000 1999
------- --------
<S> <C> <C>
CONDENSED STATEMENTS OF CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $(8,295) $ 6,286
Changes in operating assets and liabilities:
Prepaid expenses and other current assets 2 --
------- --------
Net cash provided by (used in ) operating activities (8,293) 6,286
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Equity investments in subsidiaries 7,955 5,870
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Purchase of treasury stock -- (12,144)
------- --------
Net (decrease) increase in cash and cash equivalents (338) 12
Cash and cash equivalents at beginning of period 338 323
------- --------
Cash and cash equivalents at end of period $ -- $ 335
======= ========
</TABLE>
Twin Laboratories Inc. ("Twin") is a direct wholly owned subsidiary of
Twinlab. Advanced Research Press, Inc. ("ARP"), Changes International,
Inc. ("Changes International"), Bronson Laboratories, Inc., Health Factors
International, Inc. ("Health Factors"), Twinlab FSC Inc., Twin
Laboratories (U.K) Ltd. ("Twin U.K.), Changes International (U.K.) Ltd.
("Changes U.K."), Changes A Twinlab Company, s. de r.l. ("Changes Mexico")
and PR*Nutrition, Inc. ("PR*Nutrition"), are indirect wholly-owned
subsidiaries of Twinlab. Twinlab, ARP, Changes International, Bronson
Laboratories, Inc., Health Factors, Twinlab FSC Inc., Twin U.K., Changes
U.K., Changes Mexico and PR*Nutrition have provided joint and several full
and unconditional senior subordinated guarantees of the Notes.
The assets, results of operations and shareholders' equity of Twin
comprise substantially all of the assets, results of operations and
shareholders' equity of Twinlab on a consolidated basis. Twinlab has no
separate operations and has no significant assets other than Twinlab's
investment in its subsidiaries. Twin has no other stockholder other than
Twinlab. Accordingly, the Company has determined that separate financial
statements of its subsidiaries would not be material to investors and,
therefore, are not included herein.
<PAGE> 8
Summarized unaudited financial information as of September 30, 2000 and
December 31, 1999 and for the three months and nine months ended September
30, 2000 and 1999 is as follows:
<TABLE>
<CAPTION>
BRONSON
CHANGES LABORATORIES, HEALTH PR*
TWIN ARP INTERNATIONAL INC. FACTORS NUTRITION(a)
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
AS OF SEPTEMBER 30, 2000
Current assets $ 176,449 $ 904 $ 9,813 $ 11,274 $ 7,665 $ 2,743
Noncurrent assets 139,990 202 11,380 38,087 5,351 119
Current liabilities 78,499 448 3,072 3,142 1,194 373
Noncurrent liabilities 48,732 -- -- -- -- --
Shareholder's equity 189,208 658 18,121 46,219 11,822 2,489
AS OF DECEMBER 31, 1999
Current assets $ 177,402 $ 1,079 $ 11,282 $ 9,953 $ 7,250 $ 2,762
Noncurrent assets 142,363 195 11,985 39,713 5,452 160
Current liabilities 59,529 431 5,000 3,620 1,006 338
Noncurrent liabilities 63,203 -- -- -- -- --
Shareholder's equity 197,033 843 18,267 46,046 11,696 2,584
THREE MONTHS ENDED
SEPTEMBER 30, 2000
Net sales $ 76,416 $ 1,143 $ 8,879 $ 2,996 $ 2,950 $ 935
Gross profit 59,656 387 7,401 1,831 331 616
Net income (loss) (11,066) (19) (422) (91) (2) (89)
THREE MONTHS ENDED
SEPTEMBER 30, 1999
Net sales $ 81,921 $ 848 $ 11,395 $ 3,665 $ 3,122 $ 1,455
Gross profit 37,585 (23) 9,325 1,941 409 1,052
Net income (loss) 2,828 (204) 34 183 56 (158)
NINE MONTHS ENDED
SEPTEMBER 30, 2000
Net sales $ 214,980 $ 3,200 $ 30,292 $ 9,912 $ 9,936 $ 2,935
Gross profit 86,170 869 25,430 6,160 1,139 2,169
Net income (loss) (8,200) (185) (146) 173 126 (95)
NINE MONTHS ENDED
SEPTEMBER 30, 1999
Net sales $ 227,613 $ 3,245 $ 36,594 $ 11,785 $ 10,581 $ 11,780
Gross profit 109,673 521 30,668 6,426 1,506 7,792
Net income (loss) 6,368 (275) 1,241 650 304 961
</TABLE>
(a) Effective July 1, 1999, the Ironman Triathlon bar product line was
transferred from PR*Nutrition to Twin.
8
<PAGE> 9
4. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 DECEMBER 31,1999
------------------ ----------------
<S> <C> <C>
Raw Materials $17,501 $32,269
Work in Process 15,770 9,765
Finished Goods 29,130 29,792
------- -------
Total $62,401 $71,826
======= =======
</TABLE>
5. REVOLVING CREDIT FACILITY
The Company is a party to a revolving credit facility (the "Revolving
Credit Facility") with several banks and other financial institutions (the
"Lenders"), which was scheduled to expire in May, 2002.
The Revolving Credit Facility contains certain restrictive covenants
including, among other things, the maintenance of debt and interest
coverage ratios, as well as restrictions on the incurrence of additional
indebtedness, the payment of dividends and certain other significant
transactions.
Due to the third quarter 2000 inventory adjustment discussed in note 2,
the Company has requested and received from the Lenders an amendment and
waiver with respect to the Revolving Credit Facility, relating to the
Company's failure to comply with certain of the covenants contained in the
Revolving Credit Facility (the "Third Amendment"). The Third Amendment is
effective through December 15, 2000, and limits future borrowings by the
Company to the lesser of: (a) identified percentages of the Company's net
accounts receivable and net inventory or (b) $47,000. In addition, the
applicable margin in respect of Eurodollar loans has been increased to
3.0%, and the applicable margin in respect of ABR loans has been increased
to 2.0%.
At the current time, the Company's borrowings under the Revolving Credit
Facility aggregate approximately $44,000. Borrowings outstanding under the
Revolving Credit Facility at September 30, 2000 were $37,000 which have
been classified as current debt. After giving effect to the Third
Amendment, approximately $3,000 of additional borrowings are available
under the Revolving Credit Facility for working capital requirements and
general corporate purposes.
The Company and the Lenders intend to negotiate an amendment to the
Revolving Credit Facility prior to December 15, 2000, which would provide
for future borrowings generally on the basis described above. There can be
no assurance, however, that by December 15, 2000, an amendment to the
Revolving Credit Facility will be successfully negotiated or that the
Company will be able to enter into an alternative borrowing arrangement on
terms favorable to the Company. The absence of such an amended Revolving
Credit Facility or alternative borrowing arrangements would likely have a
material adverse effect on the Company and its financial condition.
6. LEGAL PROCEEDINGS
Included in other income for the three months and nine months ended
September 30, 2000 is $139 and $2,251, respectively, of proceeds from
litigation settlements.
7. NET INCOME PER SHARE
Basic net income per common share was calculated based upon the weighted
average number of common shares outstanding during the respective periods.
Diluted net income per common share was calculated based upon the weighted
average number of common shares outstanding and includes potential common
shares for dilutive options outstanding during the respective periods.
The weighted average common shares outstanding for the computation of
basic net income per common share for the three months and nine months
ended September 30, 2000 and 1999 were 28,645,000 and 31,802,000,
respectively, and 28,636,000 and 32,121,000, respectively.
Additionally, for the diluted calculation, 32,000 and 21,000 of potential
common shares were included for the three months and nine months ended
September 30, 1999, respectively. There are no potential common shares
included for the three and nine months ended September 30, 2000 as the
effect would be anti-dilutive.
8. RECENT ACCOUNTING PRONOUNCEMENTS
Recent pronouncements of the Financial Accounting Standards Board, which
are not required to be adopted at this date include SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities", which was
subsequently amended by SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the effective
9
<PAGE> 10
Date of SFAS No. 133" and SFAS No. 138, "Accounting For Certain Derivative
Instruments and Certain Hedging Activities - An Amendment of FASB
Statement No. 133". SFAS No. 133, as amended by SFAS No. 137 and SFAS No.
138, is not expected to have a material impact on the Company's financial
statements.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101 ("SAB
101"), "Revenue Recognition In Financial Statements." SAB 101 summarizes
certain of the SEC's views in applying generally accepted accounting
principles to revenue recognition in financial statements. The Company is
required to adopt SAB 101 no later than the fourth quarter of fiscal 2000.
SAB 101 is not expected to have a material impact on the Company's
financial statements.
9. OPERATING SEGMENTS
The Company has four reportable segments: TWINLAB division; Herbal
Supplements and Teas division; Changes International division; and Bronson
division. The Company manufactures and markets nutritional products,
including a complete line of vitamins, herbs, nutraceuticals,
antioxidants, fish and marine oils, and sports nutrition supplements
through its Twinlab division; a full line of herbs, phytonutrients, and
teas through its Herbal Supplements and Teas division; a line of specially
formulated nutritional supplements through its Changes International
division; and a line of vitamins, herbs, nutritional supplements and
health and beauty aids through its Bronson division.
Segment information for the three months and nine months ended September
30, 2000 and 1999 was as follows:
<TABLE>
<CAPTION>
HERBAL CHANGES
SUPPLEMENTS INTER-
TWINLAB AND TEAS NATIONAL BRONSON INTERCOMPANY
DIVISION DIVISION DIVISION DIVISION OTHER (1) ELIMINATION TOTAL
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
THREE MONTHS ENDED
SEPTEMBER 30, 2000
Net sales from external customers $ 53,792 $ 6,719 $ 8,879 $ 5,042 $ 1,984 $ -- $ 76,416
Intersegment net sales -- -- -- -- 94 (94) --
Income (loss) from operations 2,581 (17,469) (605) (152) (260) -- (15,905)
Total assets 198,023 49,001 21,193 59,601 3,967 (48,938) 282,847
THREE MONTHS ENDED
SEPTEMBER 30, 1999
Net sales from external customers $ 55,721 $ 6,308 $ 11,395 $ 6,287 $ 2,210 $ -- $ 81,921
Intersegment net sales -- -- -- -- 92 (92) --
Income from operations 5,931 (257) 25 384 (638) -- 5,445
Total assets 174,302 69,799 23,237 59,241 5,212 (45,819) 285,972
NINE MONTHS ENDED
SEPTEMBER 30, 2000
Net sales from external customers $140,895 $ 21,620 $ 30,292 $ 16,424 $ 5,749 $ -- $ 214,980
Intersegment net sales -- -- -- -- 386 (386) --
Income (loss) from operations 5,501 (14,875) (212) 486 (653) -- (9,753)
NINE MONTHS ENDED
SEPTEMBER 30, 1999
Net sales from external customers $133,147 $ 23,453 $ 36,594 $ 19,749 $ 14,670 $ -- $ 227,613
Intersegment net sales 33 2,510 -- -- 354 (2,897) --
Income from operations 6,058 3,379 1,936 1,540 975 -- 13,888
</TABLE>
[1] The "other" column includes corporate-related items and the results of two
divisions, PR*Nutrition and ARP, whose segment information is below the
reportable quantitative thresholds. The Company markets nutritionally
enhanced food bars and other nutritional products through PR*Nutrition and
publishes a sports fitness magazine and health and fitness-related books,
audios and newsletters through ARP.
10
<PAGE> 11
ITEM 2.: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The following discussion and analysis should be read in conjunction with the
response to Part I, Item 1 of this report. The Company operates through six
primary business divisions: the TWINLAB division, the Herbal Supplements and
Teas division, the Changes International division, the Bronson division, the
PR*Nutrition division, and the Publishing division. Products sold by the TWINLAB
division include vitamins, minerals, amino acids, herbs, sports nutrition
products and special formulas primarily under the TWINLAB brand name. In
addition, effective July 1, 1999, the TWINLAB division began marketing
nutritionally enhanced food bars under the Ironman Triathlon trademark. The
Herbal Supplements and Teas division produces and markets a full line of herbal
supplements and phytonutrients marketed under the Nature's Herbs brand and a
full line of herb teas marketed under the Alvita brand. The Company's network
marketing activities are conducted through Changes International. The Bronson
division markets vitamins, herbs, nutritional supplements and health and beauty
aids through its Bronson catalog, and also manufactures through Health Factors,
private label vitamins and supplements for a number of other companies on a
contract manufacturing basis. The PR*Nutrition division markets nutritionally
enhanced food bars under the PR*Bar trademark. The Company's publishing
activities are conducted through ARP.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
(DOLLARS IN MILLIONS)
2000 1999 2000 1999
------------------ ----------------- ------------------- ------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales:
TWINLAB Division $ 53.8 70.4% $ 55.7 68.0% $140.9 65.5% $133.1 58.4%
Herbal Supplements and
Teas Division 6.7 8.8 6.3 7.7 21.6 10.1 23.5 10.3
Changes Int'l Division 8.9 11.6 11.4 13.9 30.3 14.1 36.6 16.1
Bronson Division 5.0 6.6 6.3 7.7 16.5 7.6 19.8 8.7
PR*Nutrition Division 1.0 1.3 1.4 1.8 2.9 1.4 11.7 5.2
Publishing Division 1.0 1.3 0.8 0.9 2.8 1.3 2.9 1.3
------ ------ ------ ------ ------ ------ ------ ------
Total Net Sales 76.4 100.0 81.9 100.0 215.0 100.0 227.6 100.0
------ ------ ------ ------ ------ ------ ------ ------
Gross Profit 16.8 21.9 37.6 45.9 86.2 40.1 109.7 48.2
Operating Expenses 32.7 42.7 32.2 39.2 95.9 44.6 95.8 42.1
------ ------ ------ ------ ------ ------ ------ ------
Income (loss) from 0perations $(15.9) (20.8)% $ 5.4 6.7% $ (9.7) (4.5)% $ 13.9 6.1%
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1999
NET SALES: Net sales for the three months ended September 30, 2000 were $76.4
million, a decrease of $5.5 million, or 6.7%, as compared to net sales of $81.9
million for the three months ended September 30, 1999. Net sales at the TWINLAB
division contributed $53.8 million, a decrease of $1.9 million, or 3.5% as
compared to $55.7 million for the three months ended September 30, 1999. The
decrease in net sales was due to a continued inventory reduction effort at a
major customer and returns associated with the realignment of product mix in
certain mass market accounts. Sales of the Herbal Supplements and Teas division
contributed $6.7 million, an increase of $0.4 million or 6.5%, as compared to
$6.3 million for the three months ended September 30, 1999. The Changes
International division contributed $8.9 million to net sales for the three
months ended September 30, 2000 as compared to $11.4 million in the three months
ended September 30, 1999. The decrease in net sales was due to a downturn in
domestic sales which was offset in part by growth in non-domestic markets. The
Bronson division contributed $5.0 million to net sales for the three months
ended September 30, 2000 as compared to $6.3 million for the three months ended
September 30, 1999. The PR*Nutrition division contributed $1.0 million to
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net sales for the three months ended September 30, 2000, as compared to $1.4
million for the three months ended September 30, 1999. Publishing activities
contributed $1.0 million as compared to $0.8 million for the three months ended
September 30, 1999.
THIRD QUARTER HERBAL INVENTORY ADJUSTMENTS: For the quarter ended September
30, 2000, the Company recorded adjustments aggregating $16.0 million to reduce
its herbal inventory balances at its Utah location because of both
book-to-physical inventory variances and excess and slow moving products.
Book-to-Physical Variances
During the preparation of the financial statements for the quarter ended
September 30, 2000, the Company became aware of certain inventory variances
which prompted it to conduct a physical count of its herbal inventories at its
Utah location. The resulting physical inventory compilation indicated inventory
shortages totaling $8.02 million. Upon further investigation, the Company
determined that approximately $3.09 million and $0.97 million of these shortages
were attributable to fiscal 1998 and 1999, respectively. The Company also
learned that the shortages relating to fiscal 1998 and 1999 were primarily due
to the recording of certain entries without appropriate supporting
documentation. Because the adjustment relating to fiscal 1998 would have
resulted in a $0.67 million reduction in fiscal 1998 executive bonuses paid, the
executive officers will refund these amounts, and the Company has recorded a
receivable for such refunds. Therefore, the net impact on income (loss) before
provision for income taxes and extraordinary item of the inventory shortages and
bonus adjustments relating to fiscal 1998 is approximately $2.4 million. The
impact on net income (loss) of these adjustments relating to fiscal 1998 and
1999 is approximately $1.5 million and $0.6 million, respectively. Accordingly,
the Company believes that these adjustments are not material for the purpose of
recording prior period adjustments.
Reserves for Excess and Slow Moving Products
The Company anticipated significant increases in sales for herbal products
during fiscal 2000. However, consistent with industry trends, sales of the
Company's herbal products were disappointing during the first two quarters of
fiscal 2000 and, in the third quarter, were significantly below anticipated
levels. As a result, the Company significantly reduced its projection of herbal
sales for the year ending December 31, 2000, and has also decided to discontinue
the production and/or active marketing of certain herbal products.
As a result, the Company analyzed potential excess and slow moving inventory and
increased its inventory reserves by approximately $7.97 million. These increased
reserves included approximately $5.41 million relating to products that will no
longer be produced and/or actively marketed. Such products include $3.85 million
of micro-encapsulated herbal products that were introduced during the fourth
quarter of fiscal 1998 but have experienced disappointing sales.
GROSS PROFIT: Gross profit for the three months ended September 30, 2000 was
$16.8 million, which represented a decrease of $20.8 million, or 55.4%, as
compared to $37.6 million for the three months ended September 30, 1999. Gross
profit margin was 21.9% for the three months ended September 30, 2000 as
compared to 45.9% for the three months ended September 30, 1999. The overall
decrease in gross profit dollars and gross profit margin was attributable
primarily to the third quarter herbal inventory adjustments described above.
OPERATING EXPENSES: Operating expenses were $32.7 million for the three months
ended September 30, 2000, representing an increase of $0.5 million, or 1.6%, as
compared to $32.2 million for the three months ended September 30, 1999. As a
percent of net sales, operating expenses increased from 39.2% for the three
months ended September 30, 1999 to 42.7% for the three months ended September
30, 2000. The increase in operating expenses as a percentage of net sales was
primarily attributable to the Company's lower sales volumes.
INCOME FROM OPERATIONS: The loss from operations was $15.9 million for the three
months ended September 30, 2000 as compared to income from operations of $5.4
million for the three months ended September 30, 1999. The decrease in income
from operations was primarily due to the herbal inventory adjustments described
above as well as the Company's lower sales volume.
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OTHER (EXPENSE) INCOME: Other (expense) income was a net expense $2.2 million
for the three months ended September 30, 2000, as compared to a net expense of
$0.7 million for the three months ended September 30, 1999. The net increase of
$1.5 million was primarily due to an increase in interest expense of $1.2
million, as a result of increased debt levels.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999
NET SALES: Net sales for the nine months ended September 30, 2000 were $215.0
million, a decrease of $12.6 million, or 5.6%, as compared to net sales of
$227.6 million for the nine months ended September 30, 1999. Net sales at the
TWINLAB division contributed $140.9 million, an increase of $7.8 million, or
5.8% as compared to $133.1 million for the nine months ended September 30, 1999.
The increase in net sales was due primarily to increased demand for vitamins,
minerals, and supplements, and the expansion of established accounts. Sales of
the Herbal Supplements and Teas division contributed $21.6 million, a decrease
of $1.9 million or 7.8%, as compared to $23.5 million for the nine months ended
September 30, 1999. The Herbal Supplements and Teas division was impacted by the
weakness of the herbal category in both the mass market and health and natural
food store channels. The Changes International division contributed $30.3
million to net sales for the nine months ended September 30, 2000 as compared to
$36.6 million in the nine months ended September 30, 1999. The decrease in net
sales was due to a downturn in domestic sales which was offset in part by growth
in non-domestic markets. The Bronson division contributed $16.5 million to net
sales for the nine months ended September 30, 2000 as compared to $19.8 million
for the nine months ended September 30, 1999. The PR*Nutrition division
contributed $2.9 million to net sales for the nine months ended September 30,
2000, as compared to $11.7 million for the nine months ended September 30, 1999.
Effective July 1, 1999, the Ironman Triathlon bar product line was transferred
from the PR*Nutrition division to the TWINLAB division and sales attributable to
such product line are reflected in the TWINLAB division subsequent to such date.
Publishing activities contributed $2.8 million as compared to $2.9 million for
the nine months ended September 30, 1999.
GROSS PROFIT: Gross profit for the nine months ended September 30, 2000 was
$86.2 million, which represented a decrease of $23.5 million, or 21.4%, as
compared to $109.7 million for the nine months ended September 30, 1999. Gross
profit margin was 40.1% for the nine months ended September 30, 2000 as compared
to 48.2% for the nine months ended September 30, 1999. The overall decrease in
gross profit dollars and gross profit margin was attributable primarily to the
third quarter herbal inventory adjustments described above.
OPERATING EXPENSES: Operating expenses were $95.9 million for the nine months
ended September 30, 2000, representing an increase of $0.1 million, or 0.1%, as
compared to $95.8 million for the nine months ended September 30, 1999. As a
percent of net sales, operating expenses increased from 42.1% for the nine
months ended September 30, 1999 to 44.6% for the nine months ended September 30,
2000. The increase in operating expenses as a percentage of net sales was
primarily attributable to the Company's lower sales volume.
INCOME FROM OPERATIONS: The loss from operations was $9.8 million for the nine
months ended September 30, 2000 as compared to income from operations $13.9
million for the nine months ended September 30, 1999. The decrease in income
from operations was primarily due to the inventory adjustments described above
as well as the Company's lower sales volume.
OTHER (EXPENSE) INCOME: Other (expense) income was a net expense of $3.8 million
for the nine months ended September 30, 2000, as compared to a net expense of
$3.5 million for the nine months ended September 30, 1999. The net increase of
$0.3 million was primarily due to increased interest expense of $2.1 million as
a result of increased debt levels offset by an increase in other income of $2.3
million relating to litigation settlements.
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LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended September 30, 2000, cash used in operating activities
was $15.1 million as compared to cash provided by operating activities of $17.7
million for the nine months ended September 30, 1999. The increase in cash used
in operating activities was primarily attributable to the reduction in net
income, the purchase of an insurance product in January 2000, as well as lower
accounts payable due to the timing of payments.
Capital expenditures, inclusive of equipment acquired under capital lease
obligations, were $7.5 million and $11.6 million for the nine months ended
September 30, 2000 and 1999, respectively. Capital expenditures for the nine
months ended September 30, 2000 were primarily for the purchase of computer
hardware and software and related implementation costs for the Company's ERP
system using SAP software. This system is designed to provide uniform
purchasing, manufacturing and financial systems which are expected to enhance
overall efficiency and controls. These expenditures, as well as expenditures for
production equipment to expand capacity or improve manufacturing efficiency, are
expected to be approximately $9.0 million during fiscal 2000. The Company
estimates that its historical level of maintenance capital expenditures has been
approximately $1.0 million per fiscal year.
Net cash provided by financing activities was $20.2 million for the nine months
ended September 30, 2000 and primarily represented borrowings under the
Company's Revolving Credit Facility.
Twinlab has no operations of its own, and accordingly, has no independent means
of generating revenue. As a holding company, Twinlab's internal sources of funds
to meet its cash needs, including payment of expenses, are dividends and other
permitted payments from its direct and indirect subsidiaries. The indenture
relating to the Notes and the Revolving Credit Facility impose upon the Company
certain financial and operating covenants, including, among others, requirements
that the Company maintain certain financial ratios and satisfy certain financial
tests, limitations on capital expenditures and restrictions on the ability of
the Company to incur debt, pay dividends or take certain other corporate
actions.
The Company is a party to a revolving credit facility (the "Revolving Credit
Facility") with several banks and other financial institutions (the "Lenders"),
which was scheduled to expire in May, 2002.
The Revolving Credit Facility contains certain restrictive covenants including,
among other things, the maintenance of debt and interest coverage ratios, as
well as restrictions on the incurrence of additional indebtedness, the payment
of dividends and certain other significant transactions.
Due to the third quarter 2000 inventory adjustment discussed in Note 2 to the
Consolidated Unaudited Financial Statements contained in this Report, the
Company has requested and received from the Lenders an amendment and waiver with
respect to the Revolving Credit Facility, relating to the Company's failure to
comply with certain of the covenants contained in the Revolving Credit Facility
(the "Third Amendment"). The Third Amendment is effective through December 15,
2000, and limits future borrowings by the Company to the lesser of: (a)
identified percentages of the Company's net accounts receivable and net
inventory or (b) $47 million. In addition, the applicable margin in respect of
Eurodollar loans has been increased to 3.0%, and the applicable margin in
respect of ABR loans has been increased to 2.0%.
At the current time, the Company's borrowings under the Revolving Credit
Facility aggregate approximately $44 million. Borrowings outstanding under the
Revolving Credit Facility at September 30, 2000 were $37 million which have been
classified as current debt. After giving effect to the Third Amendment,
approximately $3.0 million of additional borrowings are available under the
Revolving Credit Facility for working capital requirements and general corporate
purposes.
The Company and the Lenders intend to negotiate an amendment to the Revolving
Credit Facility prior to December 15, 2000, which would provide for future
borrowings generally on the basis described above. There can be no assurance,
however, that by December 15, 2000, an amendment to the Revolving Credit
Facility will be successfully negotiated or that the Company will be able to
enter into an alternative borrowing arrangement on terms favorable to the
Company. The absence of such an amended Revolving Credit Facility or alternative
borrowing arrangements would likely have a material adverse effect on the
Company and its financial condition.
Assuming that the Company successfully negotiates an amendment to the Revolving
Credit Facility or alternative borrowing agreement, management believes that the
Company will have adequate capital resources and liquidity to meet its borrowing
obligations, fund all required capital expenditures and actively pursue its
business strategy for the next 18 to 24 months. Subject to the foregoing, the
Company's capital resources and liquidity are expected to be provided by the
Company's cash flow from operations, and borrowings under an amended Revolving
Credit Facility or alternative borrowing arrangement.
One of the Company's business strategies is to pursue acquisition opportunities
that complement or extend its existing products or product lines, or are
compatible with its business philosophy and strategic goals. Future acquisitions
could be financed by internally generated funds, bank borrowings,
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<PAGE> 15
public offerings or private placements of equity or debt securities, or a
combination of the foregoing. There can be no assurance that the Company will be
able to make acquisitions on terms favorable to the Company and that funds to
finance an acquisition will be available or permitted under the Company's
financing instruments.
RECENT ACCOUNTING PRONOUNCEMENTS
Recent pronouncements of the Financial Accounting Standards Board, which are
not required to be adopted at this date include SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities", which was subsequently
amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the effective Date of SFAS No. 133" and SFAS No.
138, "Accounting For Certain Derivative Instruments and Certain Hedging
Activities - An Amendment of FASB Statement No. 133". SFAS No. 133, as
amended by SFAS No. 137 and SFAS No. 138, is not expected to have a material
impact on the Company's financial statements.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101 ("SAB 101"),
"Revenue Recognition In Financial Statements." SAB 101 summarizes certain of the
SEC's views in applying generally accepted accounting principles to revenue
recognition in financial statements. The Company is required to adopt SAB 101 no
later than the fourth quarter of fiscal 2000. SAB 101 is not expected to have a
material impact on the Company's financial statements.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
Information contained or incorporated by reference in this periodic report on
Form 10-Q and in other SEC filings by the Company contains "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 which can be identified by the use of forward-looking terminology such
as "believes," "expects," "may," "will," "should" or "anticipates" or the
negative thereof, other variations thereon or comparable terminology, or by
discussions of strategy. These forward-looking statements involve certain
significant risks and uncertainties, and actual results may differ materially
from the forward-looking statements. For further details and discussion of these
risks and uncertainties see Twinlab Corporation's SEC filings including, but not
limited to, its annual report on Form 10-K. No assurance can be given that
future results covered by the forward-looking statements will be achieved, and
other factors could also cause actual results to vary materially from the future
results covered in such forward-looking statements. The Company does not
undertake to publicly update or revise any of its forward-looking statements
even if experience or future changes show that the indicated results or events
will not be realized.
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PART II
OTHER INFORMATION
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.46-Third Amendment and Waiver dated as of November 13, 2000 to the
Amended and Restated Credit and Guarantee Agreement (dated as of
November 15, 1996) among the Registrant, Twin and several banks and
financial institutions.
27- Financial Data Schedule
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed during the quarter ended September
30, 2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TWINLAB CORPORATION
By: /s/ Ross Blechman
-------------------------------
Ross Blechman
Chairman, President and Chief
Executive Officer
By: /s/ John H. Bolt
-------------------------------
John H. Bolt
Chief Financial Officer
DATED: November 20, 2000
-------------------------------------
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